MGX Resources Limited (MGX) Earnings Call Transcript & Summary

Thank you for joining today's teleconference for the release of Mount Gibson Iron's financial results for December 2024 half year. Mount Gibson's Chief Executive Officer, Peter Kerr, will be leading the discussion and is joined by Chief Financial Officer, Gill Dobson; and External Relations Manager, John Phaceas. Mr. Kerr will provide a brief overview, after which there will be an opportunity to ask questions. Due to time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via the Mount Gibson website shortly after completion of today's teleconference. Thank you, and I'd like to hand you over to Mr. Peter Kerr.

Thank you. Good morning, everyone, and thanks for joining us to discuss Mount Gibson's financial results for the December '24 half year. As usual, I'll give a brief overview before handing back to Lisa for any questions you may have. And also, as usual, any dollar references we mentioned are to Australian dollars unless otherwise indicated. So from an overall perspective, Mount Gibson delivered a reasonably steady underlying financial performance in the half year period, and that reflected substantial work undertaken in transitioning mining operations to the eastern half of the main pit at Koolan Island and to prepare the operation for progressively increasing production rates over the remaining 2 years of the mine life. Iron ore sales totaled 1.3 million wet metric tonnes, generating sales revenue of $160 million FOB and creating an underlying profit before tax and impairments of $18.7 million for the December half year period. Unfortunately, the bottom line earnings result was impacted by noncash accounting impairment expenses totaling $75.8 million against the carrying values of the Koolan Island assets, and that reflected the recent iron ore price volatility and the weaker iron ore market outlook from consensus forecasts. These expenses effectively bring forward depreciation and amortization charges that we would otherwise incur in the next 2 years. The accounting impairment adjustments, along with the associated $30.3 million derecognition of the book value of deferred tax assets, resulted in a bottom line net loss after tax of $71.7 million, as you've seen. The accounting treatment for the carrying value of the deferred tax assets does not impact our cash income tax position in which the company retains the right to utilize all available carryforward tax losses and other allowable deductions going forward. From a production and cash flow perspective, sales and costs in the December half year keep the company on track to achieve the fiscal '25 sales guidance of 2.7 million to 3 million wet metric tonnes at a targeted cash operating cost of $95 to $100 per wet metric tonne FOB that we ship, and that's before royalties and capital projects. Iron ore prices and wet season weather permitting, we're therefore expecting to generate positive cash flow over the remainder of this financial year. Now touching in a bit more detail on the Koolan Island operations, where our core objective remains to safely maximize all sales and cash flow over the next 2 years. We released the details of the production physicals in our quarterly activities report last month with the key point that the September quarter captured the transition of mining to the eastern half of the pit and the December quarter saw ore production and shipping rates increase. The eastern half of the pit will remain the primary source of our high-grade ore for the remaining life of the operation. The mining activity in the half year necessitated a significant increase in total material movement versus the prior period and a temporary increase in the waste-to-ore strip ratio to 3.7:1 for the half year compared with 0.7:1 in the prior corresponding period. And the strip ratio will vary in line with our waste extraction cycles in the main pit at times going forward, but is expected to average less than 2:1 for the remaining mine life. Positively, the ground support remediation work in the central footwall area, which was impacted by the August 2023 rockfall, progressed to be over 80% complete, putting it on track for completion by the middle of this year, and this will shortly enable us to access some of the high-grade ore in that area of the pit. From a processing perspective, throughput was closely aligned with ex-pit ore production totaling 1.1 million tonnes, while the tertiary circuit installed mid last year enabled us to more efficiently process the harder material from the eastern sections of the pit. A number of process flow improvements have been made to the plant, and we anticipate increased throughput and improved costs going forward. In relation to financial performance, site operating cash flow for the half year was good at $19.4 million from sales revenue of $160 million and insurance proceeds of $27 million, which settled the claim relating to the 2022 plant fire that we had. Outflows comprised cash operating and capital costs of $152 million, including those associated with the haul ramp reconfiguration in the September quarter and royalties, which totaled $15.7 million. And just for a reminder, royalties on our products relate to the state government royalty of 7.5% and to other third-party royalties totaling another 2%. In relation to earnings, Koolan Island generated an underlying profit before tax and impairments of $26.3 million. And after accounting for the $75.8 million of noncash impairments that I mentioned, the site recorded a loss before interest and tax of $49.5 million. From a group perspective, cash flow totaled $21.2 million, as we previously noted in our last quarterly report, and that comprised $19.4 million from Koolan Island plus interest and other income of $11.1 million and less our corporate administration and exploration costs, which totaled $9.3 million for the half year. After taking into account share buyback purchases of $4.7 million and normal positive working capital movements, the company's cash and investments balance totaled $437.2 million at 31 December, and that was a small reduction of $5.1 million from the balance at the end of June 2024, and obviously reflected largely what we've done in the September quarter with the repositioning of the ramp. This cash position excludes our $20 million holding in Midwest iron ore producer, Fenix Resources. So including that holding, our total cash and investment backing of $457 million (sic) $437 million equates to approximately $0.37 per share. In relation to the iron ore market in the period, conditions, as we all know, were weaker and more volatile. The 62% Fe Platts Index started the period above USD 110 a tonne, and this is CFR, before dipping below $100 several times and touching a low of $89 per tonne before finishing the half year period at around $100 again. That resulted in an average 62% Fe price in the period of USD 102 CFR, down approximately USD 20 a tonne from the prior corresponding period. The price of high-grade 65% Fe fines material, which is obviously relevant for Koolan Island, followed a similar trajectory, and it averaged USD 116 a tonne CFR in the period, and that compared with $132 previously. Positively, as prices have weakened a little, the high-grade premium has increased, and that averaged 9% in the half, over double the 4% in the prior corresponding period. And while the Australian dollar average was relatively flat at USD 0.66, it did decline rapidly late in the period and is now around USD 0.635 and provides an important natural hedge against the reduced U.S. dollar iron ore prices that we've seen. Consequently, the business realized an average price of USD 84 a tonne FOB, so that's after shipping freight for high-grade fines ores, and our average grade was 64.6% Fe in the half, and that compared with USD 116 FOB and at a slightly higher grade, 65.4% in the prior period. Shipping freight rates remained similar to the prior period between sort of $12 and $13 a tonne. I also want to note that our sales contracts are structured such that the ultimate price that we receive is based on monthly averages up to 2 months after the shipment date. And that frequently results in positive and negative pricing adjustments over a quarter, which can appear exaggerated during periods where prices are volatile or shipment volumes vary or indeed are unevenly spread. So as a result, while comparisons of our realized prices over longer periods are consistent, comparisons over some shorter periods can be impacted by these factors and a bit hard to assess. But we try to do that with our disclosures where we separately release prices pre and post the final invoice adjustments. In relation to hedging, you'll note that at period end, we entered into hedge contracts covering 290,000 tonnes, and this is on the basis of 62% Fe. So it's a cash settled hedge that ultimately protects our overall prices. And that was between AUD 156 and AUD 163 per tonne over the period January to June 2025. Since balance date, we've added a further 298,000 tonnes to the hedge book and that's over the period of February to June. So when you look at that volume, that provides good margin protection for us for a little over 1/3 of our forecast second half fiscal '25 sales. Turning to capital management. As you know, we commenced the on-market share buyback of up to 5% of our issued capital in September. At period end, we purchased just under 15.3 million shares. And of those 14.9 million has settled given the ASX T+2 trading terms. And the purchases were at an average price of $0.313 for an outlay of $4.7 million. The Board has now resolved to increase the scale of the buyback from 5% to up to 10% of the company's issued shares, and we'll be looking to accelerate that in the near term. Consistent with prior years, an interim dividend has not been declared and the position with respect to distributions and franking credits will be considered at the end of the financial year as usual. So before we wrap up, I just wanted to reiterate our business strategy where we have a twin focus. Firstly, on safely maximizing the cash flow and sales from Koolan Island over its remaining life. And secondly, on building the company's capacity to execute new investments to create a larger and more profitable business, and that's something we're obviously keenly focused on at the minute. We're looking primarily at Australian opportunities, predominantly in bulk materials and base metals, but there are some others. And we have to date made a number of initial investments totaling approximately $17 million in junior resources companies where we see the potential for partnering, financial and development opportunities. Our investment and acquisition search activity is now intensifying, and we'll provide more detail on that over the course of this year. These investments that I've just mentioned are separate to our $20 million holding in Fenix, where we continue to support the Fenix team in developing that business. So to finish, in relation to our outlook, the production performance in the first half has been steady and positions the business to achieve the fiscal '25 sales guidance of 2.7 million to 3 million wet metric tonnes at a targeted cash operating cost of AUD 95 to AUD 100 FOB, and that's before royalties and capital projects. We expect our production and shipping rates to lift over the remainder of this financial year. And that, in turn, gives us confidence of delivering tangible progress on our second objective over the coming year. So with that, I'll now hand back to you, Lisa, for any questions we may have. Thanks.

[Operator Instructions] We do have a question from Hayden Bairstow from Argonaut.

I think the production sort of profile is reasonably well understood. Can you just -- sort of running sort of sub-3 strip ratios everything, but how much variability is there? Is there some sort of guide where it goes back to nothing and goes up again that you can give us over the last couple of years? And then delay on that inventory adjustments, I mean, [ total estimate ] to be honest.

Look, on the strip ratio, it does vary. So it's not a flat ratio going forward till the end. We'll probably provide a little bit more guidance on that. But we'll see, I think, in next financial year, an increase towards the start of the year just in the way the waste cycles work and then a decrease after that. But the average is as we've stated from now till the end. But that's something we're looking at providing a bit more clarity on ahead of time. So watch out for that. [ Re-Inventory ], when you say inventory, you mean the ore stocks that we're producing and selling?

Yes. You've always got a sizable inventory adjustment into your accounts that pretty...

It is hard to predict. And that's because we generally -- the high grade we produce, we basically sell that fairly quickly. But we do have a stockpile of more medium-grade material. And by medium grade, I don't mean it's that low. It's more like the sort of 60% to 62%. That type of material we blend in to try and smooth our grades to keep a consistent profile for shipments. And so at times, we have a provision there for the pricing of that material on a stand-alone basis, and that provision gets released every so often as we sell because we attract the high-grade prices by blending it. That's a bit of a hard one to do. But I think if you're forecasting the 65% grades, occasionally, we'll have a slightly lower grade, 63%, but that won't change the overall grade too much. But if you do it on that basis, the inventory is going to be hard for you to assess other than just simple mining costs flowing through to the margin.

All right. And just on D&A, is that -- now it's impaired, is that second half drop from that run rate of $120 million a year down to $50 million? Is that the new run rate? Or is it even lower than that?

Well, if you look at our carryforward assets, you'll see that in terms of property, plant and equipment and other values, I think we're down to about $70 million or $80 million in total. So -- and that will be amortized fairly consistently over the remaining tonnes to be mined, which is whatever is left in the reserve, that 5.5 million to 6 million tonnes.

And you're adding CapEx still through sustaining and stuff, right?

We are. Yes, the CapEx, our sustaining capital, we report in our cash operating costs, so we don't distinguish that and capitalize it. That's just more like an operating nature type capital cost. Where we do a particular cutback and we capitalize that waste, we actually disclose that number, and that would be added to the balance sheet and then amortized separately. Largely, we are through most of that waste already. We've got portions left, but not too much.

[Operator Instructions] Peter, we don't have any -- sorry, Hayden's come back.

Just on those -- I mean the non-Fenix holding, I mean even the Fenix holding, I guess, what is the strategy around some of these things? Can you just confirm so that Fenix is today, what, $23 million or something? And then what's the rest of it on today's prices?

The rest of it sits around -- it will be a little bit up from where we were at 31 December, so $18-or-so-million. And their investments sub-5% in a number of companies. But I can't tell you specifically on them, but other than with most of those companies we're in active discussions about financing or partnering or other forms of opportunities for us. Whether we pursue them is another thing, but we've got some good relationships we're building. And 1 or 2 of them, if we can work on them and come to something with them, then we'll be making a release.

Does that include Fenix or those...

No. Fenix is sitting there. That investment has arisen out of the sale of the assets we did a couple of years ago, plus we've exercised 1 of the 2 tranches of options that we had. So we're basically sitting there as a supporting shareholder, and that sits there in a separate category, hence, why we broke it out of our cash and investment reserves.

And just one final one. Are you -- I mean this has been a long sort of story about the end of life of Koolan and having to deploy your capital somehow. I mean it hasn't happened for a while. We've gone almost through a pricing cycle at the bottom on base metals. Do you feel like there's real pressure here to get something done in the next 2 years, so you have a cash flow source beyond Koolan? Or could we be sitting here in 2 years' time and you're just a cash box looking for acquisitions?

I think we're going to see something happen well before then, Hayden, realistically. There's a lot of effort going into it on this front. And those investments are just part of the start of a few of them, but there are a range of things happening, and I would be surprised if we haven't got something within the next year.

Thank you, Peter. We have no further questions.

All right. Thanks, Lisa, and thank you, everyone, for listening. And if you have any further queries, then please call us at the notes -- the numbers rather on our releases. Otherwise, have a good day. Thank you.